If you choose to set up a Self-Managed Super Fund (SMSF), you no doubt believe you are making a prudent financial decision which will benefit you and your family well into the future.

However, all too many people have suffered a financial loss or taxation difficulties because of problems with their SMSF.

Let’s look at some of the advantages and potential pitfalls of SMSFs, and how problems might arise.

The pros and cons of SMSFs

Some of the key advantages include:

  • Increased investment choices. While super funds are limited in their investment vehicles, SMSFs can access a much wider range of potential opportunities, including purchasing investment property.
  • Higher levels of flexibility. Traditional super funds are run to benefit the majority of the membership, while a SMSF can be set up in a way which best benefits the individuals who are members of the fund.
  • Enhanced taxation strategies. These can be tailored to the needs of the members of the SMSF.
  • Because the SMSF is run to your advantage, you have increased oversight as to the management.
  • Protection from creditors. This is because it is more difficult for creditors to access superannuation belonging to an individual.

However, there are also some challenges and disadvantages. Generally speaking, members of a SMSF must permanently reside in Australia.

SMSF trustees have specific legal obligations they must take seriously. This includes remaining on top of all developments in superannuation law, ensuring that the Trust Deed is complied with, and acting at all times in the best interests of members.

There are also tax implications. Income of a SMSF is taxed at a concessional rate of 15% – however this is only the case if the SMSF is considered to be a ‘complying’ fund. This means that it needs to meet specific criteria as determined by legislation.

Importantly, if a SMSF is not considered to be a complying fund by the ATO, it will be taxed at the highest marginal tax rate (currently 47%). Income which is generally considered to be assessable and therefore complying includes employer contributions and personal contributions, but generally excludes spousal contributions and government co-contributions.

The complicated nature of these contributions highlights the importance of obtaining detailed advice when setting up or running an SMSF. 

How SMSFs can run into difficulty

Losses can arise in an SMSF in a number of ways. It may have been set up by individuals without a complete understanding of the legal and tax requirements and obligations.

The trustees may receive poor or negligent investment advice, or the Trust Deed governing the SMSF (or the SMSF vehicle itself) may not be drafted well. 

There could potentially also be significant financial implications if there is a marital or relationship breakdown, and family law superannuation splitting orders are required.

At Pentana Stanton, we have dealt with many matters involving SMSFs and financial advisors, accountants, and family law disputes. Contact us today if you need assistance for losses or taxation difficulties arising from your SMSF.